Economists debate impact on US of international financial crises

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A picture of spreading economic gloom was brightened by lively sparring over International Monetary Fund policies and funding among four internationally recognized economists during a panel discussion titled "Global Financial Crises: Danger and Opportunities."

Institute Professor Emeritus and 1987 Nobel Laureate Robert Solow moderated Monday's discussion in Wong Auditorium and also participated as a panelist. The other panelists were Rudiger W. Dornbusch, Ford International Professor of Economics; Marina Whitman, professor of business administration and public policy at the University of Michigan; and Janet L. Yellen, chair of the President's Council of Economic Advisors (CEA). The event was the fifth annual Catherine N. Stratton Critical Issues Lecture.

A standing-room-only crowd listened intently as the panelists discussed the causes of the current global financial crises and the effects of these crises on the United States and other economies.

In general, the four agreed on the critical role of Thailand in the current crisis, with the collapse of the bat in July 1997, and on the unpleasant possibility of Brazil's following suit in the next few weeks. The panelists endorsed an oversight role for the IMF, a slender hope that the successful bailout and recovery of Mexico can serve as a case study elsewhere, and confidence in the US economy's basic strength.

Dr. Yellen, a former member of the Federal Reserve Board, focused on the impact of the crisis on the US economy. "We are extremely fortunate to have been affected from a position of strength [and] are very well positioned to sustain the shock of the crisis," she said.

The crisis in Asia will affect the US trade position, with exports declining and imports increasing, she said. Declines in commodity prices will affect farmers, and the rising spread of corporate debt shows symptoms such as cancellation of mergers, she added.

"We are the key customers of crisis-affected countries and we have to be prepared to be good customers still," Dr. Yellen said. "We'll have to accept a rising trade deficit and rising calls for protection of industry here. And we'll have to do more. Social safety nets in affected countries must be strengthened [to care for] children, the unemployed and the elderly."

As for the "$64,000 question -- how to prevent another such crisis," Ms. Yellen recommended "G22," a report by bankers that emphasizes greater transparency among debtor countries, better risk assessment, more responsibility in the private sector and heartier skepticism about high-gloss government guarantees.

Marina v.N. Whitman, professor of business administration and public policy at the University of Michigan and former vice president for public affairs at General Motors Corp., zeroed in on economic truisms that have been disrupted in the past year.

These beliefs formerly known as truth, she said, include "more is better" when it comes to investment, "faster is better" when it comes to liberalizing any economy, regardless of infrastructure; and "some currencies just don't count."

The current unfolding crises were triggered, after all, by a "currency no one had heard of in a country few people could find on a map" and resulted directly from expensive "overnight money," Professor Whitman said. Thus, it has become important to know the form in which capital comes, to regulate the rate at which it comes, and to strengthen the legal and financial architecture of the countries newly open to investment, she said.

"Basically, there is no such thing as a free lunch," she said.

Professor Whitman also noted that political and psychological insight would be necessary along with financial data if effective remedies and regulations are to be established.

Professor Dornbusch, an expert in currency problems, inflation, stabilization and trade policy, applied a wry wit to world problems.

"It's a terrible idea to give the IMF more money so they can have shoot-outs with the hedge funds," he declared. "The IMF should have been concerned with balance sheets. The IMF programs are right -- their foresight is terrible, and the IMF managing director should be fired."

He also used the brief question-and-answer period to ask Dr. Yellen about the fate of the nation's surplus. "Why is our president not saying 'tax cut now'?"

Her answer -- that President Clinton is reserving the surplus for social security -- appeared later to inspire a question from the audience based on the work of Charles Kindleberger, Ford Professor of Economics Emeritus. Professor Kindleberger himself stood to say, "I am concerned with political weakness. Strong leadership is needed in this crisis and I don't see it forthcoming."

Professor Dornbusch volleyed back at once. "Alan Greenspan [chairman of the Federal Reserve] is a great leader. He looks haggard in the morning because he really does think about the markets. Lowering interest rates is a good thing."

The Catherine N. Stratton Lecture Series on Critical Issues honors Kay Stratton, wife of the late MIT President Julius A. Stratton, whose more than 50 years of commitment to the Institute include not only these annual lectures, but also the "Aging Successfully" seminars held every spring.

The series is supported by an endowed fund initially seeded by the MIT Women's League, an organization founded at MIT in 1913 to enrich the lives of women in the MIT community. The League continues to sponsor the Critical Issues series and co-sponsors the "Aging Successfully" seminars with the Medical Department.

A version of this article appeared in MIT Tech Talk on October 21, 1998.